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Diminishing Returns of Malls

March 7, 2010

This passage from the following article brings to mind Reilly’s Law of Market Areas.

While their lawyer promises their plan will create 400 permanent jobs and $1.5 million in annual taxes, the surrounding city of Harvey has some of the highest crime, unemployment and poverty rates in Chicagoland. This rust belt suburb needs so much more than retail.

Reilly’s Law determines the boundary between two cities with a given population (or number of shopping opportunities).

One conclusion that comes from Reilly’s Law is that the market area of a certain region increases but at a decreasing rate (the second derivative in terms of relative size turns out to be negative), which means that retail development is a bad way of increasing the economy of a city because as the area increases, there are diminishing returns to scale.

Retail development may be a limited tool at increasing the economy, but malls are very helpful when avoiding zombies.

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